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Due diligence best practices for corporate sponsors

Corporate sponsorship is big business with potentially bigger rewards for brand owners, but it also comes with a degree of risk in the event of adverse publicity arising from a sponsorship deal.

With so many investigations surrounding corruption in sports today, it’s important for companies to ensure they are carrying out the proper amount of due diligence before and during a sponsorship period. “More than ever, it has become imperative that a sponsor protect its brand,” says Po Yi, a partner in the advertising and marketing group at law firm Venable.

The eruption of the continuing corruption scandal involving the Fédération Internationale de Football Association (FIFA), the international governing body of professional soccer, in particular, has played an important role in putting corruption in sports on the global playing field. For many leading multinational companies, the FIFA scandal has also served as a harsh wake-up call to the detrimental effect that corruption in sports can have on a company’s reputation.

Numerous global companies terminated their sponsorship deals with FIFA, including Sony, Emirates, Johnson & Johnson, Continental, and Castrol. Many others similarly found their brand names under a public microscope, including Adidas, Coca-Cola, Kia, McDonald’s, and Visa, just to name a few. And that hasn’t been the only sporting scandal to speak of. In 2016, for example, Adidas and Nestlé pulled out of deals with the International Association of Athletics Federations (IAFF) following doping allegations.

Situations like this highlight the need for, and importance of, a “morals clause” in sponsorship contracts. A morals clause gives companies the right to terminate if the sponsored individual or organization does something morally wrong by becoming the subject of a public scandal that puts the company in a bad light and threatens to tarnish the brand’s reputation or image.

“The existence of a morals clause in a contract is no longer controversial; we see this all the time,” says Gonzalo Mon, a partner with law firm Kelley Drye. “The scope of them, however, is controversial.”

Typically, the language inserted into a morals clause gets heavily negotiated between the corporate sponsor and the endorser. During the drafting and negotiating stage of a morals clause, it is in the corporate sponsor’s best interest to broadly define the triggering event, with discretion to determine what will trigger a termination right, Yi says.

For example, is the trigger a felony conviction, indictment, or government investigation? What constitutes an act that harms the sponsor’s brand reputation? Keep in mind, however, the endorsed organization or individual is going to push for much narrower trigger events.

Yi also reminds companies to be wary of a morals clause containing language that applies only to a triggering event that happens during the term of the sponsorship. It’s important for the corporate sponsor to negotiate for termination rights and exercise the morals clause concerning an event that happened prior to the parties’ relationship, but becomes public during the term of the sponsorship, she says.

In an interesting turn of events, many athletes and entertainers are increasingly insisting on a reciprocal morals clause, not wanting to associate themselves with a tarnished brand—and many of them have the platform to do so. One example of a circumstance that potentially could trigger a reciprocal morals clause occurred in February 2017, when Under Armour CEO Kevin Plank came under fire for praising President Donald Trump, calling him a “real asset to the country,” in an interview with CNBC.

That interview quickly sparked a backlash of criticism on social media from several of Under Armour’s top endorser athletes—including Dwayne “The Rock” Johnson, Misty Copeland, and Stephen Curry—who decried the statement as being contrary to their values and beliefs. With a reciprocal morals clause, any one of them could back out of the deal.

Due diligence. For a corporate sponsorship’s part, carrying out due diligence prior to entering a sponsorship is crucial. Generally, the risks associated with sponsoring an individual are higher than sponsoring an event, or the governing body of a sport, as the brand owner is buying into the individual’s public and private persona. As the FIFA corruption investigation demonstrates, however, there are always exceptions to the norm.

What sort of celebrity or athlete are you doing a deal with? What is their history? What is their persona? Do they have a controversial personality or notorious reputation that some may find offensive? “Part of it is doing the due diligence upfront and understanding what your risk tolerance is,” Mon says.

It is in the corporate sponsor’s best interest to know as much about the endorsed individual as possible. “It’s very important for the brand to understand what the pros and the cons are and go into the relationship with its eyes fully open,” Yi says.

Enlist someone to monitor social media throughout the sponsorship period relating to their brand or endorser to quickly identify any potential issues and have the ability to act quickly. “It starts with something as simple as a Google search,” Mon says. Companies should ensure that they keep an eye on not just traditional media channels, but social media as well.

Screen for any content or behavior that could be considered problematic—racially insensitive comments or comments that suggest sexually harassment, for example. If possible, conduct a criminal background check.

“In addition to conducting background diligence on potential partners, sponsors should ensure that their partners are aware of the sponsoring company’s values and should clearly articulate expectations as to partner behavior,” says Jared Bartie, a partner at law firm O’Melveny. “Companies should also communicate regularly with partners regarding matters of concern, even if they do not rise to the level of terminating a sponsor relationship. If a potential negative situation can be prevented from occurring, it is best to do so to protect the company’s investment and reputation.”

Corporate sponsors should also think about what remedies they want to seek, Yi says. Do they only want to negotiate termination of the contract, or do they want to put into the contract language that allows the corporate sponsor to claw back money that has been lost in a sponsorship deal that goes sour?

All told, where corporate sponsors intend to utilize events, athletes, and celebrities as a global platform to increase their brand profile, it’s imperative to conduct the appropriate level of due diligence and respond quickly to adverse media events. When a sponsorship goes well, the rewards for the company can be considerable.

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